Tokyo, November 29, 2019 -- Moody's Japan K.K. has downgraded the short-term
and long-term deposit ratings, the baseline credit assessment
(BCA), Adjusted BCA, and long-term Counterparty Risk
Assessments (CRAs) of The Daishi Bank, Ltd.
The ratings outlook is stable.
Today's rating action concludes the review for downgrade initiated
on 29 August 2019, driven by the increasingly challenging operating
environment that continues to pressure the bank's profitability.
The affected ratings and assessments are as follows:
- Baseline Credit Assessment (BCA): downgraded to baa2 from
baa1
- Adjusted BCA: downgraded to baa2 from baa1
- Long-term bank deposit ratings (foreign/domestic):
downgraded to A3 from A2
- Short-term bank deposit ratings (foreign/domestic):
downgraded to P-2 from P-1
- Long-term Counterparty Risk (CR) assessment: downgraded
to A2(cr) from A1(cr)
- Short-term Counterparty Risk (CR) assessment: affirmed
at P-1(cr)
- Outlook changed to stable from rating under review
RATINGS RATIONALE
The downgrade of Daishi Bank's long-term deposit ratings
to A3 from A2 is driven by the structural challenges the bank faces in
maintaining profitability, amid persistently low domestic interest
rates and severe competition among banks. Continuously declining
profitability has weakened the bank's ability to absorb losses,
challenging the sustainability of the bank's business model.
Credit costs are currently low, but with net interest income declining
and no substantial reduction in expenses, weak pre-provision
profitability means that even a small increase in credit costs will significantly
impact earnings.
Japan's shrinking and aging population over the past few decades
pose challenges for the bank's traditional lending business models.
Poor demographics form a major factor behind anemic economic growth,
with low interest rates and reduced credit demand, in turn,
pressuring margins.
To manage these structural challenges, Daishi Bank is seeking to
improve its profitability by reducing costs and improving efficiencies.
Daishi Bank and The Hokuetsu Bank, Ltd. (Hokuetsu Bank),
both leading banks in Niigata Prefecture, became wholly-owned
subsidiaries of Daishi Hokuetsu Financial Group, Inc. (Daishi
Hokuetsu FG), a jointly formed holding company in October 2018.
After the establishment of Daishi Hokuetsu FG, Daishi Bank and Hokuetsu
Bank remain separate legal entities, but the two banks plan to merge
and integrate systems in January 2021. The integration will enable
them to reduce overlapping branches and achieve significant cost savings
and efficiency improvements. Moody's views such radical cost
rationalization as key to improving profitability, especially in
the absence of an increase in topline revenue and without taking on additional
asset risk.
The integration of systems will initially increase costs, but Moody's
sees scope for potential synergies, as overlapping shared functions
will be eliminated over time. Nevertheless, Daishi Hokuetsu
FG's profitability will continue to be pressured by structural challenges
in Japan, such as the low interest rate environment and severe competition.
When assessing Daishi Bank's credit profile, Moody's
takes into account its parent, Daishi Hokuetsu FG's financial
profile, based on Moody's assumption that the probability
of default for Daishi Hokuetsu FG, Daishi Bank, and Hokuetsu
Bank is the same, and the fact that the government of Japan will
likely provide support via the holding company rather than the operating
banks.
Daishi Bank's BCA of baa2 takes into account Daishi Hokuetsu FG's (1)
strong liquidity, which is firmly backed by solid deposits and highly
liquid securities, such as Japanese government bonds (JGBs);
(2) moderate capital profile; (3) moderate asset risk, supported
by strong loan quality but tempered by loan concentration in the real
estate sector and exposure to market risk; and (4) weakening profitability.
Daishi Bank's liquidity is backed by its strong deposit base in
its home market, supported by Daishi Hokuetsu FG's about 40%
market share in Niigata Prefecture. Japanese government bonds and
municipal bonds, which are highly liquid, accounted for around
45% of its group securities portfolio at the end of June 2019.
The bank's Adjusted BCA is also at baa2, because Moody's has
not incorporated any affiliate support in the rating.
The outlook on the ratings is stable, reflecting Moody's expectation
that Daishi Bank will maintain its strong liquidity profile, while
its group profitability will remain pressured by the ultralow interest
rate environment.
Daishi Bank's A3 long-term deposit ratings incorporate a two-notch
uplift from the bank's BCA of baa2. The uplift reflects Moody's
assumption of a very high likelihood of support from the Government of
Japan (A1 stable), in times of need, given the bank's importance
to the economy of Niigata Prefecture, and Niigata Prefecture's
importance as a regional economy, ranking 16th out of 47 prefectural
economies in Japan.
Moody's does not have any particular governance concern for Daishi Hokuetsu
FG, and does not apply any corporate behavior adjustment.
Moody's views Daishi Hokuetsu FG's risk management framework as
consistent and commensurate with the company's risk appetite.
FACTORS THAT COULD LEAD TO AN UPGRADE
Moody's would consider upgrading Daishi Bank's ratings if
its group profitability improves on a sustained basis, without significantly
raising risk, against the backdrop of the challenging operating
environment.
FACTORS THAT COULD LEAD TO A DOWNGRADE
Moody's would consider downgrading Daishi Bank's ratings if
(1) its group tangible common equity ratio falls below 8%;
(2) its group profitability further weakens, due to rising credit
costs or losses from its securities portfolio; (3) its asset quality
deteriorates; or (4) its liquidity weakens, due to an increased
reliance on market funds or investments in less liquid assets.
The principal methodology used in these ratings was Banks Methodology
(Japanese) published in November 2019. Please see the Rating Methodologies
page on www.moodys.com for a copy of this methodology.
The Daishi Bank, Ltd., headquartered in Niigata City,
Niigata Prefecture, is a regional bank in Japan. At the end
of March 2019, the bank reported consolidated assets totaling JPY6.0
trillion.
REGULATORY DISCLOSURES
For ratings issued on a program, series, category/class of
debt or security this announcement provides certain regulatory disclosures
in relation to each rating of a subsequently issued bond or note of the
same series, category/class of debt, security or pursuant
to a program for which the ratings are derived exclusively from existing
ratings in accordance with Moody's rating practices. For ratings
issued on a support provider, this announcement provides certain
regulatory disclosures in relation to the credit rating action on the
support provider and in relation to each particular credit rating action
for securities that derive their credit ratings from the support provider's
credit rating. For provisional ratings, this announcement
provides certain regulatory disclosures in relation to the provisional
rating assigned, and in relation to a definitive rating that may
be assigned subsequent to the final issuance of the debt, in each
case where the transaction structure and terms have not changed prior
to the assignment of the definitive rating in a manner that would have
affected the rating. For further information please see the ratings
tab on the issuer/entity page for the respective issuer on www.moodys.com.
For any affected securities or rated entities receiving direct credit
support from the primary entity(ies) of this credit rating action,
and whose ratings may change as a result of this credit rating action,
the associated regulatory disclosures will be those of the guarantor entity.
Exceptions to this approach exist for the following disclosures,
if applicable to jurisdiction: Ancillary Services, Disclosure
to rated entity, Disclosure from rated entity.
Regulatory disclosures contained in this press release apply to the credit
rating and, if applicable, the related rating outlook or rating
review.
Please see www.moodys.com for any updates on changes to
the lead rating analyst and to the Moody's legal entity that has issued
the rating.
Please see the ratings tab on the issuer/entity page on www.moodys.com
for additional regulatory disclosures for each credit rating.
Tomoya Suzuki
Asst Vice President - Analyst
Financial Institutions Group
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
Graeme Knowd
MD - Banking
Financial Institutions Group
JOURNALISTS: 852 3758 1350
Client Service: 852 3551 3077
Releasing Office:
Moody's Japan K.K.
Atago Green Hills Mori Tower 20fl
2-5-1 Atago, Minato-ku
Tokyo 105-6220
Japan
JOURNALISTS: 81 3 5408 4110
Client Service: 81 3 5408 4100
